Capital gains tax on UK residential property – what it means for investment vehicles

With effect from 1 April 2015, capital gains tax (CGT) will become payable in respect of any gain realised on the sale of UK residential property by a non-UK resident individual, partnership, or a non-UK company which is in narrowly controlled ownership.

The charge will not apply to widely held funds and investment vehicles (which are generally not taxed at the fund level). The charge will also not apply to disposals of shares or units in widely held investment vehicles.

The UK Government have also made the public commitment that it does not intend to broaden the scope of the charge to commercial property.

The rate of tax will be 20% for non-UK companies, and 18% or 28% for non-UK resident individuals.

How will the tax charge be calculated?

The extended CGT charge will only apply to gains accrued and realised on or after 6 April 2015. It will not apply to gains arising before this date. To calculate the charge on a property purchased before this date taxpayers may either:

  1. ‘rebase’ the property to its market value on 6 April 2015 (this is the default position);
  2. ‘time apportion’ the whole gain over the period of ownership; or
  3. compute the gain (or loss) over the whole period of ownership.

In calculating the tax payable, non-resident individuals will have access to the annual exempt amount (£11,000 in the 2014/15 tax year), and will be able to offset any losses made on UK residential property.

How will the tax be collected?

The process of reporting and collecting the extended charge from non-residents is still to be finalised. HMRC’s current intention is that a non-resident disposing of UK residential property will need to notify HMRC within 30 days of the disposal.

Non-residents who already make an annual self-assessment return to HMRC will be able to pay amounts due as part of their next self-assessment. Other non-residents must pay during the 30 day notification period following their disposal.

What is residential property?

Residential property is property used, or suitable for use, as a dwelling, including property that is in the process of being constructed or adapted for such use. Communal residential property (including care homes, nursing homes and some types of purpose built student accommodation) will generally be excluded from the charge.

Partnerships

For UK partnerships, chargeable gains will be apportioned between the UK resident and non-UK resident partners. Non-UK partnerships which are treated as transparent for UK tax purposes will receive similar treatment; chargeable gains will be apportioned between the UK resident and non-UK resident partners.

Fund vehicles

A collective investment scheme will be exempt provided it can show that it satisfies a “genuine diversity of ownership” (GDO) test. The existing GDO test (which is used in the Authorised Investment Funds legislation) will be replicated, subject to minor amendments, for the purpose of the extended CGT charge.

Non-UK companies

The charge will not extend to disposals of residential property by widely held non-resident companies because of the Government’s concern that it would dissuade non-resident institutional investors from owning and developing UK residential property.  

However, the private investment vehicles of individuals, families or small groups of individuals or families will be in scope if they satisfy a narrowly controlled company test.  Broadly speaking, a narrowly controlled company is a non-resident company controlled by five or fewer individuals or companies which are themselves narrowly controlled.

Pension funds, Sovereign Wealth Funds, Financial institutions

Financial institutions, pension funds and sovereign wealth funds that are “qualified institutional investors”, and non-UK companies controlled by such entities will not be narrowly controlled companies and will not be subject to the extended CGT charge.